A startup is an entrepreneurial project that seeks, either with their own investment or with the help of a third party, to undergo a journey towards successful monetization of a product or service. Although the failure rate is high, the most valuable companies in 2020 are, and have been, startups like Amazon, Apple, Google, Microsoft, Tesla, Uber…
The startup investment ecosystem has gained traction in the last ten years. While the construction industry has had a hard time innovating and the margins of startup investment was very low, 2020 ended with over $1.3 billion USD invested in new business models for the industry.
The previous record was set on 2018, with over $1.8 million USD invested. Also, it´s the fourth year in a row where the amount of funding rounds surpasses the 100 mark.
What are the stages of a startup?
CEMEX Ventures divides startups into six phases in which it differentiates how advanced startups are on their way to monetization or becoming an indispensable solution in the market.
A startup only exists and makes sense if it solves at least one pain point in the industry in which it operates and, although the failure rate is high, success can be measured in any of the following six stages.
In each of them, different forms of financing can be given, but each phase has main players that, in a way, help the growth of the new business model.
Stages of a startup
As in any project, the phase of analysis is crucial for the detection of a real problem in the niche market in which the startup wants to act. The challenge it solves for the industry will be key in determining the success or failure of the proposed solution afterwards.
However, it is not enough to notice this pain point; it´s necessary to assess the intensity or severity to evaluate the cost of the opportunity, as well as to consider other alternatives and competitors.
As an entrepreneur, you should also question yourself with the following:
- Is my solution a real answer to the problem being solved?
- Can my solution affect other pain points in the industry by aggravating them and/or reducing the acceptance of the target market?
- Is my solution similar to an already existing one?
Listening to potential customers certainly helps to define more precisely the pain points that are intended to be fixed.
This analysis takes place in the pre-seed phase, also considered the idea phase because all it takes is to have the idea and convince someone to come and do it with you. It is a good time to lay down the legal basis for the project and translate them into the Partner Act.
What is primarily sought in the seed phase is to validate the business model. Important decisions will be made, like determining the methodology that a startup will follow. This phase seeks the first materializations of a startup. This can be done through developing prototypes, which are small experiments carried out to validate the initial idea on which a startup is based.
Its objective is the validation of the initial value hypothesis. An early-stage prototype of a development does not need to be functional, nor a viable product. It is not to be confused with an MVP (Minimum Viable Product), which must be both functional and viable.
It´s time to make numerous iterations until you find the right solution. Validation of an idea is the process by which evidence is gathered, through experimentation, to make quick, informed, and risk-free decisions.
Certain hypothesis and initial assumptions should be proposed, and through a verification method and a criterion of satisfaction it will either be confirmed or rejected. The rejection, or non-validation, of the initial hypothesis reflects the need to pivot towards a new assumption.
As for the forms of financing, at this stage the bootstrapping dynamics like the one that starts and expands only by the personal resources of entrepreneurs, and the revenue generated by the company take center stage. In addition, public aid, business angels or the participation of incubators emerge as support agencies for incipient projects, a very common term in this ecosystem: FFF (Family, Friends, Fools).
The early stage indicates the beginning of a phase in which the idea is left to evolve until it becomes a product or service in the market. It´s now the time to launch a test. It will not be the final version; it will now be tested to see it´s a Minimum Viable Product (MVP).
The minimum viable product is a model that does not have its full functions, making the test less complex. It is released as a first version, with the results and information being collected. After its release it should be analyzed to evaluate if it meets the needs of customers; if not, improvements are made with new versions that try to satisfy the user.
Typically, at this stage startups already have a team, independently of the size, if they cover the required areas and run the initial tasks. Now is the moment to have a business model defined, even if it’s not complete.
This phase is key and will help you fully understand the effect you are having on the scenario that was prepared in the previous phases. Being in close contact with customers, it is all about testing the terrain and expanding your audiences.
At this stage, in addition to the funding agencies seen in the previous phase, gain more value Venture Capitals and accelerators, which are entities that beyond supporting emerging ideas, also help new business models test their solutions and access customers. Another dynamic that continues to see more traction is crowdfunding between the circles of interest.
Strong market demand is met if a startup’s product or service reaches this stage. This means that there will be upward figures in terms of new customers, recurring customers, and billing. Profitability here is paramount. This is when the team starts to grow, and recruitment begins.
This phase has the highest failure rate. It does not mean that the product or service stays fixed, since you will probably have to adjust it to approach a new sector of your target audience, meet new demands, or occupy new spaces that weren’t planned.
Funding at this stage is also crucial, either to cover the necessary changes or to continue onto the next step. In addition to the agents and dynamics already mentioned, in this phase the Venture Capitals and Corporate Venture Capitals take center stage, being the main difference between them that the former has a single objective: financial (the return of capital), while the second has a double objective: financial and strategic, prioritizing the generation of strategic value for the corporation.
Additionally, Private Equity also appear as institutions that invest in other private companies with high growth potential in exchange for controlling a percentage of the company or its shares.
Faced with a more widespread definition of the term startup, a scaleup demonstrates a proven business model that allows it to consider more ambitious goals, for example, internationalization, expansion to other sectors or hiring new professionals.
In this phase, companies that have already advanced in the execution of their business model move forward, consolidating their growth in both revenue and employees.
According to the definition of the Scaleup Institute of the United Kingdom and OCDE, for a company to be considered a scaleup it must have grown during the last three years at an annual rate of more than 20%– either in number of employees or in turnover (billing).
New markets are sought during the expansion phase and are critical to business continuity. In general, a more ambitious market is wanted, so international expansion arises. On the other hand, expansion can also occur in the same geography, but in different segments including new services or products under the umbrella of the same solution.
At this point, it is often necessary to reach agreements with large companies and obtain financing and support in their infrastructure to expand the business model both geographically and among entrenched customers.
This phase is not mandatory and does not always take part among startups. There are business models whose goal is to become a high value and long-term company. However, it is very common for the last step to be to perform an exit by selling the startup. Even so, not many arrive at this stage and those who do are characterized by their strength, high potential, and opportunities to continue to grow.
This output can occur in many ways, although three common options stand out: sale of the founders’ shares to another company, acquisition by another company or an Initial Public Offering (IPO), which means their entry into sale.
For CEMEX Ventures, driving the construction revolution is more than investing; it is committed to building together a journey towards success with hundreds of startups. That´s why CEMEX Ventures promotes events like Construction Startup Competition on the search for innovative startups in the construction world in order to help them the highest peak.
When you are part of the CEMEX Ventures family, you have access to the commercialization and expansion of your business model by relying on CEMEX’s enriching relationships with the construction industry, and an unparalleled global and local network.